LONDON, May 22 (Reuters) - Lloyds Banking Group will next week launch the sale of about 25 percent of its TSB business via a stock market flotation with the pricing expected to be below book value, banking industry sources told Reuters.

The amount sold is likely to be at the bottom end of earlier guidance, they said, reflecting a cooling of investor interest in UK company flotations in recent weeks following a flurry of activity earlier in 2014.

TSB's Chief Executive Paul Pester said in November Lloyds could initially sell between 30 and 50 percent of the business, which has 631 branches and 4.5 million customers, making it Britain's seventh-biggest lender. However, Lloyds Finance (BSE: LLOYDSFI.BO - news) Director George Culmer said in May the bank would sell a minimum of 25 percent.

Banking industry sources said the IPO, which will take place before the end of June, is expected to value TSB below its book value of 1.5 billion pounds, meaning Lloyds will make a loss on the sale.

"They're being a bit more realistic on valuation. There's just not appetite in the market," one of the sources said. "There's just a rash of consumer-exposed IPOs, and TSB is very consumer-focused."

Clothing chain Fat Face pulled its planned London listing on Thursday, citing market conditions as the main factor in its decision. Holidays-to-insurance firm Saga priced its IPO at the bottom of its original range.

"TSB a month ago would have been the hottest deal around," one banker told Reuters.

Lloyds must sell all of TSB by the end of 2015 as a condition of its 20.5 billion pound state bailout during the 2008 financial crisis. It is expected to sell it in three stages and needs to sell the first tranche by the end of the second quarter to be on track to meet the deadline, the sources said.

Lloyds wants to sell in June because it may not be able to in the following months. It will enter a close period in the run-up to its results on July 31. August is traditionally a difficult time to conduct share sales because of the holiday season and a sale in September might be complicated by an independence vote in Scotland, where Lloyds is registered.

Pester began sounding out potential investors in Britain and the United States in January, hoping they would be attracted to TSB because it had no legacy issues relating to past misconduct and would benefit from Britain's economic recovery.

Lloyds is currently trading at 1.3 times its book value while HSBC is trading at 1.1 times. Barclays (Berlin: BCY.BE - news) and Royal Bank of Scotland (LSE: RBS.L - news) are both trading below book value, with the legacy of past misconduct continuing to weigh on the shares.

Lawmakers and regulators are keen to see new banks emerge to break the dominance of Britain's biggest five banks, which control more than three quarters of the personal current account market and TSB is seen as a viable challenger.

Lloyds had originally planned to sell the branches to the Co-operative Bank but that fell through last year before a 1.5 billion pound funding gap at the Co-op was exposed.

Lloyds then reverted to a stock exchange listing for the branches, which it re-named TSB, reviving a 200-year-old brand last seen on the British high street in 1995.

The European Commission approved the IPO last month and agreed to extend the original deadline for the sale of November 2013. Competition Commissioner Joaquin Almunia said establishing TSB as a standalone bank would increase competition in UK retail banking.

The government has begun to sell its holding in Lloyds and wants to sell its remaining 25 percent stake before the next election in 2015. Lloyds managers see the sale of TSB as helping it return to being a "normal" bank.

Lloyds and TSB declined to comment. Citi declined to comment. JP Morgan and UBS were not immediately available for comment. ($1 = 0.5925 British Pounds) (Editing by Tom Pfeiffer)